Good day, and welcome to Modiv Industrial, Inc. Fourth Quarter 2023 Conference Call. Please note this event is being recorded. I would now like to turn the conference over to John Rainey, Chief Operating Officer and General Counsel. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining us for Modiv's Industrial's Fourth Quarter 2023 Earnings Call. We issued our earnings release before the market opened this morning, and it's available on our website at modiv.com. I'm here today with Aaron Halfacre, Chief Executive Officer; and Ray Pacini, Chief Financial Officer. On today's call, management will provide prepared remarks, and then we will open up the call for your questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under the Federal Securities Laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts, such as statements about our expected acquisitions or dispositions, are also forward-looking statements. Our actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of the factors that could cause our results to differ materially from these forward-looking statements are contained in our SEC filings, including our reports on Form 10-K and 10-Q. With that said, I would like now to turn the call over to Aaron. Aaron, the mic is yours.

Thank you, John. Hello, everybody. Thanks for joining our fourth quarter conference call. For those who don't know John, he's our COO and General Counsel, and with the release of these financial results, we'll formally make him a named executive officer, which means he'll be subject to Form 4 filings alongside myself, Ray, and our Board of Directors. Speaking of Ray, since I said a ton in our earnings press release, how about we jump right to hear more details on our financial results and I'll come back before the end to take questions. Ray?

Thank you, Aaron. I'll begin with an overview of our fourth quarter operating results. Revenue for the fourth quarter was $12.3 million compared to $13.8 million in the prior year period, which included a $3.8 million early termination fee from Sutter Health in advance of our signing a new lease for our Rancho Cordova property with the state of California. Excluding the 2022 lease termination fee, revenue increased 23% compared to the prior year period. The revenue increase reflects the impact of 12 industrial manufacturing property acquisitions during the first 7 months of 2023, partially offset by 14 noncore property dispositions in August 2023. Fourth quarter adjusted funds from operations, or AFFO, was $4.5 million, up 41% when compared with the $3.82 million in the year-ago quarter after excluding the 2022 lease termination fee. The increase in AFFO reflects the revenue increase, along with decreases in G&A and property expenses, which were partially offset by increases in straight-line rents and interest expense. On a per share basis, AFFO was $0.40 per diluted share for this quarter, which is $0.05 above the average of our 3 analyst estimates, even after accounting for an increase of 1 million shares in the weighted average number of fully diluted common shares outstanding. G&A decreased by $850,000 compared with the year-ago quarter, reflecting the absence of a relocation reserve accrued in the year-ago quarter, lower professional fees due to timing differences, and a decrease in D&O insurance. Property expenses decreased $807,000 compared with the year-ago quarter, primarily reflecting the disposition of properties with modified gross leases and double net leases in August. Excluding the impact of swap valuations, cash interest expense increased by approximately $1.3 million, reflecting greater borrowings outstanding during 2023, given that during the year-ago quarter, we only had an average of $157 million outstanding on our credit facility. I'll now discuss our full year operating results. Revenue for the full year was $46.9 million compared to $40 million in the prior year, excluding the $3.8 million early termination fee, for an increase of 17%. AFFO was $14.7 million, up 14% when compared with the $12.9 million in the prior year after excluding the 2022 lease termination fee. AFFO per fully diluted share was $1.33 for the full year compared with $1.26 per fully diluted share after excluding the 2022 lease termination fee in the prior year. The 6% increase in AFFO per diluted share is less than the percentage increase in AFFO, due to an increase of 842,000 shares in the weighted average number of fully diluted common shares outstanding. The increase in AFFO reflects the $6.9 million revenue increase offset by a $3 million increase in straight-line rents. A $1.2 million decrease in G&A, a $1.4 million decrease in property expenses, and $475,000 of dividend income also contributed to the increase in AFFO. The decrease in G&A reflects lower headcount, the absence of the 2022 relocation reserve, decreases in D&O insurance, and technology costs, partially offset by an increase in professional services. The decrease in property expenses again relates to the disposition of properties with modified gross leases and double net leases in August. These positive variances were partially offset by a $5.1 million increase in cash interest expense, which primarily reflects the increase in average borrowings outstanding during 2023 compared to 2022. The $475,000 of dividend income was earned by the investment in preferred stock or Generation Income Property, Inc. that we received as partial consideration for the disposition of 13 properties last August. GIPR redeemed the preferred stock for common stock on January 31, 2024, and we immediately distributed the majority of the GIPR common stock to our common stockholders and holders of Class C units in our operating partnership. Now turning to our portfolio. Following the January and February dispositions of 2 assets held for sale, our 42-property portfolio has an attractive weighted average lease term of 14 years, and approximately 33% of our tenants or their parent companies have an investment-grade credit rating from a recognized credit rating agency of BBB- or better. Annualized base rent from these 42 properties totals $39 million as of December 31, 2023, with 38 industrial properties representing 76% of ABR, 1 retail property representing 11% of ABR, and 3 office properties representing 13% of ABR. Now turning to our balance sheet and liquidity. As of December 31, 2023, total cash equivalents were $3.1 million, and we had $280 million of debt outstanding after repaying the $3 million remaining balance of the mortgage on our Sacramento property in December. Our debt consists of $31 million of mortgages on 2 properties and $250 million of outstanding borrowings on our $400 million credit facility. Based on interest rate swap agreements we entered into during 2022, 100% of our indebtedness as of December 31, 2023, is held at a fixed interest rate with a weighted average interest rate of 4.52% based on our leverage ratio of 48% at year-end. As previously announced, our Board of Directors declared a cash dividend per common share of approximately $1.15 from the months of January, February, and March 2024, representing an annualized dividend rate of $1.15 per share of common stock. This represents a yield of 7.5% based on the closing price of $15.39 on our common stock as of March 1, 2024.

Thanks, Ray. As you all know, I much prefer open, dynamic dialogue. So instead of providing any more canned responses, how about we dive into Q&A. Operator?

And our first question today will be coming from the line of Rob Stevenson with Janney.

How much NOI do we need to be backing out for the $15 million of incoming sales when we're thinking about projecting our models for '24?

Yes. That was Ray, you have the...

Well, I was going to say that's already factored in, in the $39 million of ABR excludes any adjustments.

Okay. That's helpful. And then what is the most likely timing on the Costco sale closing? I assume that they wanted to get that rezoned for single-family before closing. Any other major contingent issues that need to be resolved before that deal could close?

So, good question. The way the deal is structured is they have a contingency window through April 1, and in that process, they're doing their feasibility. If they come back on April 1 and they're comfortable, then they'll put $1 million in hard money down. Then we both picked the date of no later than August of next year because we have this remaining lease term and we negotiated that we're going to benefit from this rent. There is a possibility that should they get their approvals completed sooner, we can approach Costco for a lease termination and close it sooner. But as it's currently contemplated, we wanted to give them plenty of time to finalize their approvals. What they're contemplating building here is a series of townhomes. They received 3 bids from builders, and they felt one was particularly solid because they had done their homework on this property before Costco ever moved in. So they have been studying this property for close to a decade. We remain optimistic, but currently, the next milestone will be April 1, and then after that, we could close sooner than 2025. In either case, we're going to continue to receive rent from Costco.

Okay, that's helpful. I have another question about the GIPR shares. How many shares do you still have, and what are your plans for them?

Ray will get you the number here in just a second. The plan is we are going to sell those off in an orderly fashion. We have less than 5% of the stake that we retained for running purposes. Ray, what's the actual share count?

171,000 shares.

Okay. All right. That's helpful.

We'll move those up.

Okay. And where was occupancy in the portfolio after considering the vacancy?

98%.

That's helpful. And then when do you get full control of that asset back? I think, Aaron, you talked in the release about that there were still some issues going on there. Can you talk about that and when the expected timing for being able to release that asset would be?

We've been waiting sort of on a daily basis for now for about 6 weeks. They keep saying it's going to get finalized in the courts, but it hasn't yet. We keep thinking any day. We don't know exactly what the hangup is. It's an okay process, but we've negotiated with them. My guess is that it will be soon. We did receive one LOI for the property already at rents that were substantially higher. But that said, we're not negotiating with anyone until we're fully released. I think it’s probable that they may come back and say they want to reject it. However, all signs now indicate that they will. That's what we're underwriting, and we're prepared for that. As soon as we do have it in hand, then we will start the process, which is kind of good because right now, it's winter in St. Paul; it's a dead season anyway. So as we roll into spring, that's going to be a more opportune time.

Okay. And then, Ray, when do they stop paying rent on that asset?

They stopped paying in February, but then we had a letter of credit to cover the next 6 months.

Okay. All right. So that hasn't been in the numbers for quite some time. I just wanted to make sure that there weren't any repayments as things went along. All right. Appreciate the time this morning.

The next question is from the line of Bryan Maher with B. Riley Securities.

Just a couple from me this morning. I'm sorry if I missed this in your prepared comments, and I appreciated the commentary you put out there this morning, Aaron. But can you give us a little bit more color on what your pipeline actually looks like? And given your dialogue with private equity and other investors, your likelihood to act upon any of that before maybe coming to some kind of terms with one of them, if that ever happens?

Yes, that's a great question. When considering a potential collaboration with strategic partners, I believe we will make an announcement before the end of April. If we cannot finalize anything by then, we’ll likely hold off. We've had constructive discussions, but it's a challenging time for making decisions. Regarding your question about whether we will take action before then, we think that our accumulating cash could be advantageous for these transactions. We are seeing individual property opportunities and have been actively involved to stay informed about current pricing. There's a specific property we've been interested in for the last year and a half. Last year, we made a bid, but the prices have declined. Engaging with parties without a serious commitment can be difficult. While there is always potential in the pipeline, I would say it's currently a bit lighter since we're still early in the year.

Okay. And I also noticed you sold a few shares during the quarter around kind of November through January. What was that all about? Can you give me a little color on that?

It was just an ATM. We had never turned on the ATM. We wanted to test the waters a little bit. So we did a very constrained volume and just tried to peel off a little bit more flow to increase liquidity. We were looking to smooth out some of the price surges that we were experiencing. That was what that was about. Our goal is to balance equity issuance with liquidity and everything, and that was what we aimed to do during that period.

At this time, we have reached the end of our question-and-answer session, and I'll turn the floor over to management for closing remarks.

Thank you, Rob. Thanks, everyone. Obviously, we're taking a progressively more communicative approach in the press release. I think the logic was laid out for why we're doing it. Not everyone is going to like that, I get it. But we've received increasingly more positive feedback following our third quarter earnings that this insight helps. We are a small company and there are not a lot of moving parts, particularly right now. And so the more stakeholders can understand how we're thinking, the less need for individual outreach. We hope you like it, and I always welcome your feedback. I think we'll have more announcements before our next earnings. It could be an NAV update or something regarding our strategic partner size. More to come as the spring unfolds. Thank you all for being with us and for your attention.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.